Re-Employed After 2 Weeks, Employee Gets 6 Months: Mitigation did not Apply to Contractual Notice Clause

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[author; Naomi Horrox]

The Ontario Court of Appeal has held that an employee who found a new job after two weeks was entitled to the full six months’ pay in lieu of notice under his written employment contract because the principle of “mitigation” had not been specified in his contractual termination clause.

Peter Bowes was hired by Goss Industries Inc. as Vice-President, Sales and Marketing in the fall of 2007. Bowes signed an employment agreement in September 2007 and began working for Goss in October 2007. The employment agreement provided:

“The Employee’s employment may be terminated in the following manner and in the following circumstances . . . (c) By the Employer at any time without cause by providing the Employee with the following period of notice, or pay in lieu thereof: . . . (iii) Six (6) months if the Employee’s employment is terminated prior to the completion of forty-eight (48) months of service . . .”

The employment agreement was silent with respect to whether, if the employee found a new job within that six months, his “mitigation” income would be deducted from the six months of pay in lieu of notice.

On April 13, 2011, Goss terminated Bowes’ employment without cause. Bowes started a new job on April 25, 2011 with another employer at the same salary that he had been paid by Goss. When Goss found out, it stopped paying Bowes and took the position that he was only entitled to receive the minimum entitlement under the Employment Standards Act, 2000 of three weeks’ pay in lieu of notice because he had fully mitigated his loss by finding a new job.

The Court of Appeal reasoned that because a contractual termination provision “caps” an employee’s termination entitlement, often at an amount less than the common law notice that the employee would have received without a written employment contract, Goss should not be permitted to take advantage of Bowes reemploying quickly to reduce its payment obligation. The court noted:

“It is noteworthy that in the sports, entertainment and senior management fields it is commonplace for such contractual provisions to not be subject to mitigation. Where the rich, famous, and powerful are involved, there is no suggestion that such payments are unfair to the other contracting party [the employer], even where there is, in effect, total mitigation of the loss. A contract is a contract, and it is expected that it will be honoured. Nothing short of this can be countenanced where the terminated employee is less privileged.” (para. 52)

In the Court of Appeal’s view, there is nothing unfair about requiring employers to be explicit – specifically stating in the employment contract that mitigation will apply – if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages. What is unfair, according to the Court, is for an employer to agree upon a fixed amount of damages with an employee and then at the point of dismissal inform the employee that future earnings will be deducted from the fixed amount.

On this basis, the Court of Appeal ordered Goss to pay Bowes the full six months of salary in lieu of notice, even though Bowes had been unemployed for only two weeks.

A number of earlier trial-level decisions had held that mitigation is automatically “read in” to contractual termination terms even if mitigation is not expressly stated. The Bowes case appears to overturn those previous decisions. The result in any future case will depend on the particular language of the employment contract at issue, but it appears that, at the very least, the principle of mitigation will not be automatically read in. As a result, Ontario employers should review their contractual termination provisions and consider whether they wish to specify that if the employee finds a new job during the contractual termination notice period, the “mitigation income” will be deducted from any contractual pay in lieu of notice in excess of Employment Standards Act entitlements. It is well-settled, though, that mitigation will not apply to pay in lieu of notice and severance pay under the Employment Standards Act.

Bowes v. Goss Power Products Ltd.: http://www.ontariocourts.ca/decisions/2012/2012ONCA0425.htm